Journal of Economic Perspectives: Vol. 4 No. 1 (Winter 1990)


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Debt Relief and the International Enforcement of Loan Contracts

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Eaton, Jonathan. 1990. "Debt Relief and the International Enforcement of Loan Contracts." Journal of Economic Perspectives, 4(1): 43-56.

DOI: 10.1257/jep.4.1.43


It is now apparent that the governments of many developing countries will not repay their debts as initially contracted. Creditors and creditor governments must now adjust to the realization that full repayment is either infeasible or that enforcing full payment is undesirable from the point of view of creditor countries as a whole. The question now is what to do with these debts. The Baker and Brady plans have increased U.S. government involvement in the debt crisis and have allocated public money toward its resolution. The Kenen plan, discussed in this issue, proposes still more public involvement and, in all likelihood, more public money. Each of these plans is an ad hoc response to the impasse that has arisen between some highly indebted countries and their private creditors, and aspects of each plan may help resolve this impasse. But none of these plans confronts the features of international capital markets that led to the crisis in the first place. My argument here is that the debt crisis that began in 1983 arose from defects in how international capital markets operated the previous decade. A goal of any redesign of the institutions involved in these markets should be not only to resolve the current crisis, but to keep it from happening again.

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Eaton, Jonathan (U VA)

JEL Classifications

443: International Lending and Aid (Public


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